Strategic Alliances

Chapter 10

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 STRATEGIC ALLIANCES
an agreement reached between or among
separate business entities for
collaboration on a joint project or business
which creates an ongoing separate entity.

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 Examples
• Cross licensing
• Joint Marketing, Distribution, and Sales
Agreements
• Joint Product Development
Agreements
• Alliances or Business Networks
• Consortiums
• Joint Ventures
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 Why do Strategic Alliances
• Expand market presence
• Sharing or developing technology
• Combining strong company attributes
• Pooling of financial resources

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 Elements of success
• open and frequent communication
• a well established hierarchy (who’s
responsible for what)
• a pre-determined dispute resolution
mechanism
• realistic expectations on both (all) sides
• complementary strengths and weaknesses of
partners
• capable management of the alliance
• non-competition between the partners
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 Joint Ventures
• company owned by two or more firms for
purpose of manufacturing, research,
marketing and distribution, or all of these

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 Advantages
• achieve something you couldn’t otherwise achieve
• have more control and profit opportunities than licensing
• if entering new markets:
– local partner has market knowledge and contacts
– foreign partner has required manufacturing, marketing and
financial resources
• reduces financial and political risk
• overcomes host country FDI barriers
• if strengthening existing business:
– can acquire new technology
– reduces financial risk
• achieves economies of scale in supplies, R&D,
marketing and distribution

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 Disadvantages
• requires top management attention
• possible incompatibility with partner
• inequities that grow over time
• higher political, economic risk than
exporting, licensing

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 How to Do a Successful Deal
1/ understand your capabilities and needs
2/ choose the best partner
3/ design the JV
4/ negotiate an Agreement

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 Understand your capabilities and
needs
• Do you really need a partner?
• For how long?
• Success possibility?
• Is a JV the best option?

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 Types of Joint Ventures
• Equity Joint Venture
• Contractual or Unincorporated Join
Venture
• Limited Partnership

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 Choose the best partner
• Has necessary and accessible skills and
resources
• Is compatible and has shared objectives
• Is trust mutual?
• Build an “engagement” period

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 Design the JV
• Define scope and strategic operating
freedom
• Define parent’s duties, rewards (win-win)
• Establish parent managerial roles

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 Negotiate an Agreement
• Definitions
• Scope of operations
• Management
• Settlement of disputes – arbitration
• Organization and capitalization
• Financial arrangements
• Contractual links with parents
• Rights and obligations
• Intellectual property
• Termination
• force majeure

Seek Legal Counsel!

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 Making the Venture Work
• give venture top management attention
• manage cultural differences
• watch out for inequities that grow over
time
• be flexible

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Legal Issues with Joint Ventures
• local majority equity may be required
• restrictions on termination clauses
• compensation may be payable to local
party on termination
• minimum foreign financial contribution
• minimum profits to local firm
• illegal if restricts competition, promotes
price fixing, market sharing (esp. U.S.,
E.U.)
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